(SINGAPORE) In Europe and the United States, financial institutions are fighting for survival or desperately seeking white knights.

But even if the global banking storm worsens, it is unlikely to reach Singapore's shores, analysts say. That is because banks here are well-capitalised and recent moves to raise new funds from preference share issues are likely to be motivated by cheap capital rather than worries of a shortfall.

While loan losses and the volume of non-performing loans or NPLs - the industry term for loans that are unlikely to be repaid - are likely to rise in the coming quarters, the banks are not expected to see a sudden surge in bad loans.

'We're forecasting a soft landing for the Singapore economy. In that scenario, loan losses or NPLs would not be a problem for the banks,' said David Lum at the Daiwa Institute of Research.

Instead, the banks have likely been busy tapping investors' demand for low-risk investments that offer relatively high returns, he said. 'I think in Singapore the market is starved for risk-free yield instruments.'

The preference shares offered by the banks recently promise fixed dividends ranging from 5.05 per cent to 5.75 per cent.

Analysts say that provisions for bad loans could rise significantly in the next few months, but that is partly a reflection of the unusually low volume of bad loans in previous quarters, when the economy was booming.

'We don't think there will be a huge jump in bad debts but NPLs are likely to rise from their current level of below 2 per cent,' said Merrill Lynch analysts Andrew Maule and Alistair Scarff in a report yesterday.

Citigroup analysts Robert Kong and Ivan Lim said in a note on Aug 26 that 'the present low level of provisions is likely to rise markedly as an economic slowdown permeates the economy'.

They rate all three Singapore-listed banks as low risk, 'to reflect the capital strength and financial regulation of the Singapore bank sector'.

Their tier 1 capital ratios - a measure of the banks' ability to withstand losses from bad loans - were at least 10 per cent at the end of June - 'well above the 6 per cent minimum stipulated by the Monetary Authority of Singapore', Pauline Lee, an analyst at Kim Eng Securities, noted in a recent report.

Despite aggressively expanding their loan books - the latest official estimates show bank lending grew 25.9 per cent to $265.9 billion at end-July from a year earlier - 'the banks have been highly selective' in choosing who to lend to, said Daiwa's Mr Lum. 'That should provide some sort of buffer for potential problems' from bad loans, he added.

Leng Seng Choon, an analyst at DMG & Partners Securities, said in a report last week: 'Singapore banks have high loan-loss coverage and adequate capital to withstand any asset quality deterioration.'

In fact, the banks have been strengthening their capital base further in recent months. On Aug 27, United Overseas Bank said it would raise up to $1.5 billion from a preference share issue, hot on the heels of similar fund-raising moves by its rivals.

DBS Group raised $1.5 billion in May, while OCBC Bank raised $2.5 billion through two separate offerings - the first in June and July and the second in early August.

DBS's offering boosted its tier 1 capital ratio to 10 per cent at end-June, from 9.2 per cent at end-March. In dollar terms, the bank had $18.3 billion of tier 1 capital at the end of June, compared with UOB's $11.6 billion and OCBC's $11.5 billion.

The end-June figures for OCBC and UOB do not include the capital raised from their recent preference share offerings.

Mr Leng estimates that OCBC's recent preference share offers of $2.5 billion could boost its tier 1 capital ratio by 3.1 percentage points.

His year-end forecasts for the three banks' tier 1 ratios are 10.1 per cent for DBS, 15.5 per cent for OCBC and 10.9 per cent for UOB.

Macquarie analyst Tay Chin Seng said in a recent report: 'We do not expect a repeat of the 1997-98 Asian financial crisis in the banking sector, in terms of potential NPLs' and 'even a comparison with the 2001 recession does not suggest to us that potential NPLs and provisions will reach these levels'.

But 'we do expect that there will be an increase in NPLs and loan-loss provisions, although not sufficient enough to impair overall earnings significantly', he added.

This article was first published in The Business Times on .